Your situation is not affected in any way, form or fashion by the dependent student's income. The student could earn a million dollars. But if the student provided less than 50% of their own support, they are still your dependent. Below is the gist straight from the IRS. Note that there is no mention of the student's earnings affecting your qualification to claim them as your dependent.
Understand that figuring out who claims the student as a
dependent, and determining who claims the education expenses & credits, is
two different determinations. It depends on the specific situation as outlined
below.
Here’s the general rules gisted from IRS Publication 970
at http://www.irs.gov/pub/irs-pdf/p970.pdf
If the student:
Is under the age of 24 on Dec 31 of the tax year and:
Is enrolled in an undergraduate program at an accredited
institution and:
Is enrolled as at least a half time student for one
academic semester that begins during the tax year, (each institution has their
own definition of a half time student) and:
the student's parents provide more that 50% of the
student's support (schollarships/grants received by the student do not count as
the student providing their own support)
Then:
The parents will claim the student as a dependent on the
parent's tax return and:
The parents will claim all schollarships, grants, tuition
payments, and the student's 1098-T on the parent's tax return and:
The parents will claim all educational tax credits that
qualify.
If the student will be filing a tax return and:
The parents qualify to claim the student as a dependent,
then:
The student must select the option for "I can be
claimed on someone else's return", on the student's tax return. The
student must select this option ieven f the parent's qualify to claim the
student as a dependent, and the parents do not claim them.
Now here’s some additional information that may or may
not affect who files the 1098-T. If the amount of scholarships/grants exceeds
the amount of qualified education expenses, the parent will know this when
reporting the education on their tax return, because the parent will not
qualify for any of the tax credits. (They only qualify for tax credits based on
out-of-pocket qualified expenses not covered by scholarships/grants.) Also, the parent’s will not qualify for the
credits depending on their MAGI which is different for each credit, and depends
on the marital status of the parent or parents.
In the case where scholarships/grants covers “all”
qualified education expenses, the parent’s don’t need to report educational
information on their dependent student at all – but they still claim the
student as a dependent if they “qualify” to claim the student.
If the
scholarships/grants exceed the qualified education expenses, then the student
will report the 1098-T and all other educational expenses and scholarships/grants
on the student’s tax return. The student will pay taxes on the amount of scholarships/grants
that are not used for qualified education expenses.However, if the
student’s earned income, when added to the excess scholarships/grants does NOT
exceed $6100, then the student doesn’t even need to file a tax return, and
nothing has to be reported.
